Tanzania - Rural and Micro-Financial Services Project

Report No. PID6672 Project Tanzania - Rural and Micro-Financial Servicese Project Region Africa Sector Finance Project ID TZ-PE-50441 Borrower Government of Tanzania Implementing Agency Bank of Tanzania (BOT) Initial PID Prepared May 15, 1998 Projected Appraisal Date September 1998 Projected Board Date N/A for a Learning and Innovation Loan 1. Country and Sector Background. Tanzania, with a per capita income of about US$140, is among the poorest countries in the world. The current project concept is set against a background of ongoing structural adjustment and a long history of both Government and donor involvement in schemes to promote rural and micro financial services. Structural adjustment, and financial sector adjustment in particular, has resulted in an overall withdrawal of banking services from both the rural areas and smaller customers in the urban areas as banks and other financial institutions have applied increasingly rigorous commercial criteria to their branch networks and to the products they offer. In addition, the removal of cooperative marketing monopolies has also resulted in the dismantling of traditional credit routes to smallholder farmers. The Government has been greatly concerned by these developments and has been seeking ways to promote the development of rural and micro-financial services within this new environment. Unfortunately the track record of Government and donor initiatives in Tanzania has been extremely poor by any performance criteria. Various inconsistent and incoherent piecemeal approaches have been attempted by numerous Government and donor agencies working, for the most part, totally independently of each other. 2. Project Objective. The major objective of this project is the development of a sustainable rural and micro-finance system with a wide outreach to small-scale rural and urban clients throughout Tanzania. It will seek to do this by developing a common policy framework made up of four main elements which will provide a structure for the development activities of both Government agencies and donors active in the sector. Tanzania is the first country to create such a framework and as such, this approach is truly innovative. The approach has emerged from a process of extensive research and participatory reviews involving all the major stakeholders in the sector. 3. Project Description. The project will finance the development of the common policy framwork, the four main elements of which are as follows:-- 1. An approved national policy for Rural and Micro-Finance based on  internationally recognized best practices, 2. A modified regulatory and supervisory regime which is more appropriate for the distinguishing features of rural and micro-finance institutions, 3. A set of operational guidelines or standards, operationalizing principles and best practices, for government and donors seeking to facilitate the development of the sector, and 4. A Government focal point to coordinate the development of the policy framework, to coordinate government and donor activities and to learn from various experiences in the country through rigorous monitoring and evaluation of ongoing microfinance programs. While modest in the scope of its activities, the project is ambitious in its overall objective in that it is intending to transform old, entrenched attitudes supportive of subsidized and targeted rural credit into a modern policy framework reflecting international experience of "best practice" in microfinance. To achieve this, the project is choosing to maximize the use of Government agencies and personnel to support changes in their thinking by (1) providing them with opportunities to learn about new approaches to microfinance (training), (2) exposing them to successful examples of microfinance (study tours) and (3) broadening learning and stakeholder participation through workshops and seminars. Hence a continued emphasis from PHRD through PPF to the project itself on training, study tours and workshops all oriented towards achieving a very specific and clear set of objectives. 4. Project Financing. The project will amount to approximately US$2 million and will be processed as LIL. IDA would finance 90% of estimated project costs (net of taxes) with the Government financing the remaining costs. The project will facilitate and support further investment by other donors and private investors reaching possibly up to US$50 million over the next three years. 5. Project Implementation. The Rural and Microfinance Focal Point, established in BOT, will take the lead in project preparation and oversee project implementation in consultation with other stakeholders, most notably other directorates of BOT, the Cooperative Department and industry representatives. 6. Project Sustainability. Sustainability has been addressed throughout the project preparation process (1) by encouraging broad Tanzanian participation and commitment during the development of the project concept and, (2) by making sustainability a key measure of overall project effectiveness and development impact. Within the project itself, support will only be directed to Microfinance Institutions and Microfinance Institution Service Providers on the basis of both a business plan and performance indicators chosen to measure progress towards sustainability. In addition, resources will be provided to strengthen capacity for monitoring and evaluation of different initiatives in Microfinance and to feed the results of these evaluations back to the industry through regular conferences and workshops, thus encouraging practitioners to build on successful experiences and to discard unsuccessful approaches. Finally, the incentive framework built into the project will be designed in such a way as to reward achievement of sustainability goals and to reallocate resources away from activities which fail to move towards these goals. 7. Lessons Learned from Past Operations. There are three main lessons which have been learnt as a result of previous experience in Tanzania. First, the -2 -  previous approach using directed lines of credit was ineffective, costly, unsustainable and of limited impact due to poor outreach. The new approach emphasizes sustainability, distinguishes clearly between effective and ineffective institutions, and maximizes outreach on a sustainable basis by leveraging deposits as the source of funds for lending. Secondly, uncoordinated initiatives, whether donor-led or Government-led, tend to undermine each other where there is no common adherence to a mutually agreed set of principles. The approach under this project encourages all stakeholders to participate in the development of a common framework made up of an agreed set of principles and based on internationally recognized best practice as a way to maximize the impact of all Government and donor investment in the sector. Thirdly, experience from the joint Government/donor review mission in September 1997 in which 13 different donors participated, indicates that there is strong and broad-based donor interest in supporting the development of sustainable rural and micro finance services. This project has been designed to facilitate and leverage donor investment in the sector rather than displace it, by using a modest level of IDA funds strategically to finance a few key activities which will then enhance the economic and social impact of the much larger collective contributions provided by other parties. 8. Poverty Category. The project has an indirect poverty focus. The primary beneficiaries will be the Microfinance Institutions who will gain from strengthened business planning capacity, enhanced training and other learning opportunities, other capacity building measures, an improved emphasis on sustainability, and a more consistent and business-oriented relationship with both the Government and the donor community. The ultimate beneficiaries will be the customers of the emerging rural and microfinance institutions who enjoy improved access to a variety of financial services specially targeted at small-scale savers and borrowers throughout the country. 9. Environmental Aspects. The project, classified as Category C, will not have any direct impact on the environment. 10. Contact Point: Ms. G. Rubambey Director of Banking P. 0. Box 2939 Dar es Salaam Phone: (255-51) 112703 Fax: (255-51) 119155 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending July 31, 1998. - 3 -